EIU Global Forecasting Service

Multiple risks are present in the global trading system

January 18th 2018

The economic nationalist sentiment of the Trump administration has thus far been contained by geopolitical realities that have raised the primacy of security concerns. For example, as China is a key player in dealing with North Korea’s nuclear weapons programme, the need for co‑operation between the two major powers is likely to constrain the breadth of trade measures that the US will bring against China in 2018. In other cases, political expediencies are likely to prevent the US from following through on its most alarming protectionist threats in the coming years. The US has also faced domestic resistance from business groups that would be the most harmed by major protectionist moves. In addition, the US is seeking to narrow its trade deficits with Canada and Mexico through a renegotiation of the North American Free-Trade Agreement (NAFTA), but Canada and Mexico will baulk at any attempts to introduce tariffs. The US has demonstrated its willingness to impose trade restrictions, even on allies, after it imposed stiff duties on Bombardier, a Canadian aircraft manufacturer, in December. Although there is a good chance that the duties will be reduced or removed, this has left the Canadians more wary of the US government's approach to trade. Despite this, we forecast that the negotiations will be completed in 2018 given its economic significance to all three parties, and expect measures to be introduced on the environment and the digital economy that will be acceptable to all parties, together with tighter labour standards and rules-of-origin requirements that benefit the US.

Nonetheless, global trade, especially bilateral trade between major economies, is still at risk from targeted protectionist measures. At present, the central risk to trade between the world’s two largest economies emanates from the concern over US imports of Chinese-produced steel. Despite the minor trade concessions signed with China in May, other steps have been taken that signal a deterioration in trade relations between the countries. In August Mr Trump directed the US trade representative, Robert Lighthizer, to begin investigating unfair trade practices related to China's policies on intellectual property rights and technology transfer. In late November the US began its first self-initiated investigation in 25 years, targeting aluminium and steel imports from China. On November 30th the US Treasury Department indicated that it would indefinitely suspend the Comprehensive Economic Dialogue (CED) with China—the CED was designed to allow discussions on trade issues in the US‑China relationship.

The Trump administration has consistently linked concerns about Chinese trade practices with US national security. In December, trade was a significant issue raised in the administration's National Security Strategy, a key document that lays out the priorities areas for US foreign policy. In April Mr Trump relied on a rare piece of legislation to initiate a separate investigation into the threat that steel imports pose to national security. The outcome of this investigation is expected in early 2018, but we expect any actions from the US to be targeted rather than wide-ranging for the following reasons. First, the prospect of retaliation from important trading partners is likely to be factored in to these deliberations; European countries have already spoken of counter-measures that would be taken against US-made products if the protectionist measures affected their steel producers. Second, steel products form significant positions in many supply chains, meaning that measures that raise the price of steel domestically run the risk of job losses in steel-related sectors. If the Trump administration did, nonetheless, decide to impose restrictions on imports of Chinese steel unilaterally, rather than pursuing this through the World Trade Organisation, this would undermine the global trading system, and the use of national security concerns for initiating trade protections could encourage other countries to do the same. Although we would expect other countries to respond proportionately to US protectionism, an escalating tit-for-tat trade dispute cannot be ruled out.